Is $HOV poised for further growth despite recent industry challenges?

Stocks pulled back from record highs amid pressure across the technology sector after a global tech outage sent shockwaves throughout the market on Friday. Biden's exit leaves an uncertain path ahead that could rattle markets. The best-performing concepts is Homebuilding.

Considering the different perceptions of the stock, this time TigerPicks chose $Hovnanian Enterprises(HOV)$ to have a fundamental highlight to help users understand it better.

$Hovnanian Enterprises(HOV)$

Hovnanian Enterprises, Inc. is a homebuilding company, which engages in the design, construct, market, and sell single-family attached town homes and condominiums, urban infill, and planned residential developments.

It operates through the following segments: Homebuilding Operation, Financial Services, and Corporate. The Homebuilding Operation segment consists of the following geographical segments: Northeast, Mid-Atlantic, Midwest, Southeast, Southwest and West. The Financial Services segment offers mortgage loans and title services to the customers of homebuilding operations.

When it comes to publicly traded companies, there are many homebuilders that investors can choose from. But one of the cheapest, in my opinion, has got to be $Hovnanian Enterprises(HOV)$. Since the founding of the firm's predecessor back in 1959, management has delivered more than 369,000 homes. Even so, with a market capitalization of $824.5 million as of this writing, the company is not terribly large.

This doesn't mean, however, that management has not grown it into a sizable operation. As of the end of 2023, excluding unconsolidated joint ventures that it has a stake in, it operates in 113 communities spread across 13 different states here in the US.

By focusing on first-time buyers as well as first-time and second-time move-up buyers, luxury buyers, active lifestyle buyers, and even empty nesters, the company has established a nice presence for itself in the market. And with some homes as cheap as $135,000, while others are as much as $1.77 million, the company does truly cater to a wide audience.

The stock had been performing enough and was cheap enough to warrant an upgrade. This led me to increase the firm's rating from a "hold" to a "buy." And since then, shares have skyrocketed by 57.9%. That's almost triple the 20.3% increase seen by the $S&P 500(.SPX)$ . You would think that, given this massive increase, I would become more neutral or even bearish on the business. But based on the most recent data available, I actually think it might be time to upgrade further to a "strong buy."

A cheap homebuilder

To start with, we should probably touch on financial results for 2023 relative to 2022. Last year, total revenue for the company came in at $2.76 billion. That was actually 5.7% below the $2.92 billion the company reported one year earlier. This was in spite of the fact that the average price of a home delivered jumped up from $512,902 to $539,249. The decline, then, was driven largely by a drop in the number of homes delivered from 5,538 to 4,878.

With the drop in revenue came, not surprisingly, a decline in profitability for the business. Net income fell from $214.8 million to only $195.2 million. It's true that operating cash flow shot up from $89.5 million to $435.3 million. But once we adjust for changes in working capital, we get a decline from $237.7 million to $213.1 million. Lastly, EBITDA for the business managed to fall from $478.7 million to $426.8 million.

Outside of the revenue, profit, and cash flow data, there were some other interesting data points in 2023 that we can explore. For starters, the number of new homes ordered by customers came in strong at 4,647. That was slightly better than the 4,477 homes ordered in 2022. But this did come at a cost. In order to get more orders, management had to settle for a reduction in the average price of a home from $551,804 to $539,947. And even though net new orders came in strong, the total backlog for the company declined from 2,186 homes to 1,824 homes.

The number of homes in backlog suffered in part because of high cancellation rates. When focused on properties that were already in backlog and excluding those involved in unconsolidated joint ventures, we get quarterly cancellation rates for 2023 of between 12% and 16%. By comparison, for 2022, the first three quarters of the year saw cancellation rates of between 8% and 9%. It was only in the fourth quarter that we saw this jump to 13%.

Moving into the 2024 fiscal year, we can see some interesting results. Both in the second quarter of the year on its own and for the first half of the year, all relative to the same windows of time in 2023, Hovnanian Enterprises reported growth in revenue. This was driven by continued growth in the number of homes delivered. For the first half of this year, this number totaled 2,346 properties. That's up from the 2,163 properties delivered at the same time one year earlier. And when it came to the second quarter of the year, we are looking at deliveries of 1,283 homes compared to the 1,225 homes delivered in the second quarter of 2023.

Once again, we have seen some weakness from an average sales price perspective. This can be seen in the chart above. Normally, you would expect this to have a negative impact on profitability. But this ended up not being the case. For the first half of this year, the $69.4 million in net income that the company reported was comfortably above the $47.5 million reported at the same time in 2023. It's true that operating cash flow plunged from $66 million down to only $0.1 million. But on an adjusted basis, it expanded from $56.3 million to $63.7 million. Meanwhile, EBITDA for the business managed to grow from $136.7 million to $165.6 million.

The results experienced by the company for the second quarter were very similar to this. The only difference was that in no case did we see a decline on a year-over-year basis in profitability or cash flows. This doesn't mean that we didn't see other negative data points. For instance, backlog for the institution fell from 2,318 homes in the second quarter of last year to 2,018 homes at the same time this year. But as you recall, this does represent an improvement over the 1,824 homes that were in backlog at the end of 2023.

Financials

Based on the data provided, Hovnanian Enterprises is benefiting from a nice increase in orders. For the first half of the year, the company reported net new orders of 2,639 homes. That was well above the 2,265 homes that were ordered at the same time in 2023. We did see a slowdown in growth when focusing only on the second quarter of this year compared to the same time last year. And we also saw a decline in the average sales price from $531,951 to $519,716. But the fact that backlog is starting to grow again is certainly positive and has been aided by a decline in the cancellation rate. In the first quarter of this year, the cancellation rate represented 10% of backlog. That was down significantly from the 16% seen in the first quarter of 2023. And year over year in the second quarter, we saw a decline from 16% to 13%.

Trading Multiples

If we annualize the financial figures seen so far for 2024, this would mean that we should anticipate net income this year of about $285.2 million. Adjusted operating cash flow should be around $241.1 million, while EBITDA should come in at $517 million. Using these figures, you can see in the chart above how shares of the company are currently priced. You can also see, in the table below, how the stock is priced compared to five similar firms. What I found was that using each of the three valuation metrics, Hovnanian Enterprises ended up being cheaper than its peers.

This does not mean that investors are entirely out of the woods. There has been some industry-specific data that has been disconcerting. Just recently, the US Census Bureau revealed that, in the month of May, the sale of new single-family homes was 11.3% lower than it was just one month earlier. On a year-over-year basis, new single-family home sales are actually down a whopping 16.5%. The fact of the matter is that high interest rates have started to finally weigh down on housing demand. But as I touched on in another article, from 2008 through 2023, housing construction is down about 40.1% compared to the time from 2000 through 2007. Between interest rate cuts being on the horizon and pent-up demand, any sort of weakness like this will only be temporary.

Takeaway

Based on the data currently provided, I must say that I continue to be impressed by Hovnanian Enterprises. The company has proven itself to be a high-quality operator, even though it has faced some weaknesses here or there. Shares are attractively priced, both on an absolute basis and relative to similar firms. We might see some weakness in the industry moving forward. But with how cheap the stock already is, it's difficult to imagine shares falling materially from here. Given these factors, I think it's only appropriate to upgrade the stock to a "strong buy."

Stock Price Forecast:

Here are the target price forecasts for the next 12 months from analysts.

Based on 1 Wall Street analysts offering 12 month price targets for Hovnanian Enterprises in the last 3 months. The average price target is $155.00 with a high forecast of $155.00 and a low forecast of $155.00. The average price target represents a -14.20% change from the last price of $180.65.

Resource:

https://seekingalpha.com/article/4702638-hovnanian-enterprises-strong-additional-upside-is-warranted

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